No government can destroy an economy without consequences

Fiscal problems have piled up too high to correct in one go – but the Tories have had 14 years to sort

‘What a mess” were the words of a Tory MP just after the GDP figures were released this week. The UK economy contracted 0.3 per cent in the last quarter of 2023. A recession was declared. “Well”, this MP said, “at least we’ve got another chance to turn it around”. That “chance” is thought to be Jeremy Hunt’s March Budget, which until recently was being billed by both the Chancellor and the Prime Minister as an opportunity for a tax-cutting extravaganza. Many Conservative MPs are expecting big things. So are the public, after both Rishi Sunak and Hunt took to the Sunday papers last month to announce that change was coming.

No one shouldn’t get too excited, however. Reports this week suggest that Hunt has far less room to offer up tax cuts than he thought, with debt servicing repayments estimated by the Office for Budget Responsibility to be higher than originally anticipated.

reports this week that Hunt may need to scrap a 2p cut to the basic rate of income tax he was hoping to announce. With every penny off income tax accounting for roughly £7bn, that money starts to add up fast.

None of this is terribly surprising. When Hunt stood up and announced his Autumn Statement last November, the OBR published alongside it news that the Chancellor had left himself only half the average headroom (compared to other chancellors) dating back over a decade. It’s no wonder that, this close to the bone, Hunt is struggling to find the cash for the kinds of tax cuts he would like to offer.

But let’s assume the best for a moment: let’s say Hunt finds the cash down the back of the sofa. Maybe we do get another round of meaningful tax cuts in a few weeks’ time. Let’s even assume Hunt won’t simply be pulling rabbits out of hats, but also be performing a true miracle with the public finances: getting the tax burden to fall from its projected post-war high and giving people the kind of tax relief they really feel in their pockets. Even then, can this Budget be the “chance” the Tories have been waiting for to turn their prospects around?

Even in the best case scenario, it’s difficult to imagine any announcement will fire a silver bullet. Taxing and spending in Britain are at all-time highs. Debt sits at £2.5trillion, and is only heading upwards. It’s going to take more than one fiscal event to turn that around; indeed it’s going to take years that the Tories simply don’t have.

They did have those years, of course, almost 14 of them.

The recession puts it all into perspective. It is likely, as described by Capital Economics this week, to be as “mild as they come”. Indeed the UK is very likely on its way out of recession at the same time it is discovering it has fallen into one. One could make the argument, as the Government is softly doing, that a temporary economic contraction was an ugly necessity for tackling price spirals: that the Bank of England’s interest rates hike were needed to take heat out of the economy and tame double-digit inflation.

In theory, none of that needs to be a nail in the coffin for a government

– not least when there is broad public understanding that many of the economic problems over the past few years are not unique to Britain, and have been made worse by external factors. But how sympathetic can people really be when politicians have failed dismally over the past decade to create a stronger economic foundation in the UK – one that would help keep the economy propped up during the bad times? Unfortunately, few substantial reforms have taken place. Even with an 80-seat majority, Boris Johnson still found it nearly impossible to take on the nimbys in his own party. Every prime minister has funnelled record levels of investment into the National Health Service, regardless of its increasingly poor outcomes and failures to make productivity gains.

It’s these areas – planning, healthcare, public sector efficiency gains – that are ripe for reform. Hitting housing targets and building energy infrastructure, getting the 2.8m workers suffering from long-term sickness treated by medical professionals and back to work: these are the kinds of reforms that would deliver growth – the kind that can balance out, or make up for, the black swan events that will inevitably come about. Instead, a dangerous, false consensus has managed to grip successive governments: that economic growth will come without effort. This recession is now a signal – and for some, a vindication – of what happens when you quietly surrender to economic stagnation.

Alongside news of the technical recession, we’ve learnt that Britons have had to endure their biggest hit to living standards since records began in 1955. GDP per capita has fallen for seven consecutive quarters, still 1.5pc below pre-pandemic levels.

People are right to worry that they are worse-off. Many will be expecting a major turn-around. But the costs people are facing – prohibitively high house prices, a record tax burden – require root and branch reform that can be helped by a Budget, but requires far more methodical public policy reform to go alongside it.

Not all blame for our current predicament can be laid at Sunak and Hunt’s doors, but the pressure does now fall on their Treasury: not only to correct for this recession, and to correct the trajectory of the tax burden, but to address many years of sheepishness and failure to get the economy on a sustainable growth track. It’s an impossible task.

With or without generous fiscal headroom, the economic problems have piled up too high to correct every ailment in one go.

That, of course, will be one of their election talking points this year: give us a bit more time to tackle those problems, too. The obvious question then being: what have you, and your many predecessors, been waiting for?

Jeremy Hunt, the Chancellor, may have less room for tax cuts than he thought